Understanding and quantifying the Loss and Damage policy space

Progress on Loss and Damage

Loss and Damage has emerged as a key area of climate policy over the last decade. New funding arrangements, including the FRLD, were agreed at COP27 and operationalized at COP28. Initial pledges to the FRLD have so far exceeded US $850 million. Yet vague definitions of the underlying concept and an absence of clearly established assessment methodologies have hampered a full understanding of Loss and Damage funding needs.

The Paris Agreement recognizes the importance of “averting, minimizing, and addressing loss and damage” in the most vulnerable countries where averting refers to reducing the risk of Loss and Damage in the first place through mitigation, and minimizing through climate change adaptation and risk reduction, leaving a need to address losses and damages where they cannot be prevented. The IPCC (2022) distinguishes between "Loss and Damage" (capital letters, singular) when referring to political debate under the United Nations Framework Convention on Climate Change (UNFCCC) and the Paris Agreement and “losses and damages” (lowercase letters, plural) to refer broadly to (observed) impacts and (projected) risks that are unavoided by mitigation and adaptation as well as linked to unavoidable increases in multiple climate hazards to both ecosystems and human communities (see IPCC, 2022).

Although of increasing saliency, quantification of Loss and Damage needs remains extremely limited in number, methodology and scope. There have been very few estimates of global Loss and Damage funding needs. UNEP (2023) reports a range of about US $200 billion to 4 trillion with different geographical coverage and referring to different time periods. Only one study by Markandya & González-Eguino (2019) reported residual economic risks globally.

Charting out a policy space for Loss and Damage

Building on a climate risk analytical perspective, scientists propose a climate policy framework for considering actions and gaps on climate mitigation, adaptation, protection, and response to help charting out the policy space for Loss and Damage. The proposal is to enhance climate policy coherence around Loss and Damage by employing a risk-layering framework. This approach, used in disaster and climate risk management, involves coordinating investments into risk management and adaptation by reducing risks to an acceptable level, providing risk finance and insurance for residual risks, and engaging in risk retention for residual risks that are neither reduced nor transferred.

Figure 1 illustrates how various gaps related to UNFCCC policy areas, risk responses, and resilience outcomes intersect. Support for closing gaps for the most vulnerable countries via Loss and Damage (through the FRLD and other Loss and Damage funding) would thus largely mean to attend to protection and response gaps and to manage impacts and risks that are unavoided and those that are linked to unavoidable increases in climate hazards.  Actions for protection gaps would include, among others, social or financial protection mechanisms, such as social safety nets and insurance. Yet, there are severe shortcomings in contingency funds for post-disaster recovery, the upgrading of social safety nets through climate-adaptive social protection (including public works), and in making healthcare systems resilient to climate shocks. Without effective and inclusive risk transfer, other risk financing and social protection mechanisms, vulnerable populations face a climate protection gap with extensive further social implications. For example, coastal settlements are already threatened by sea level rise, mountain communities face glacial lake outburst floods, low-lying areas experience more severe cyclones, coastal fisheries suffer from ocean acidification, and homes and forests are at enhanced risk from forest fires (IPCC, 2022).

Quantifying Loss and Damage needs

There is increasing empirical evidence that the economic costs of climate change are substantial. While global heating and extreme weather affect countries and communities worldwide, those regions least responsible for climate change and with the fewest resources to adapt are hit hardest. Progress in empirical estimates have led to an improved understanding of how climate change affects economic activities and has consistently shown that climate risks – even from a purely economic perspective – are very significant and highly differentiated between countries and regions; thus there is an important degree of economic inequality attributable to global warming.

Research led by CMCC in collaboration with IIASA and the Potsdam Institute for Climate Impact Research (PIK) explores novel ways of quantifying the economic costs of Loss and Damage by combining climate economics insight on damage quantification with principles of historical responsibility. The study provides estimates of current unavoided economic impacts of climate change and their geographical distribution using evidence from both bottom-up and top-down methodologies. It couples those estimates with different historical responsibility principles to compute possible contributions and entitlements to Loss and Damage funding (see fig. 2).

The analysis shows how L&D funding needs require flows from high/upper middle-income to mid/low-income countries proportional to different considered GHG (CO₂) emission responsibility start dates (1850, 1990, 2015). These dates affect the funding shares for major polluters including high and upper middle income states, but not those for low income countries. Estimates of Loss and Damage funding needs for residual impacts for 2025 amount to a range of US $128–937 billion for total global economic climate impacts of US $385–737 billion. Given the variety of methods employed, these estimates present a wider range, yet similar magnitude estimates as the only other comprehensive study conducted five years back, which reported residual economic impact estimates for non-Annex I countries with a range of $116–435 billion for 2020 and $290–580 billion for 2030 (in 2005 USD.

Loss and Damage estimates are additional to finance needs in developing countries for mitigation, estimated by IIASA researchers at more than US $600 billion, and adaptation, estimated at US $187 to 359 billion, as calculated by and with contributions of IIASA researchers.

The dynamic understanding of responsibility adopted in the study provides novel insights on how growing needs for Loss and Damage funding may be met, particularly considering that the current support architecture under the UNFCCC and Paris Agreement recognizes that funding for Loss and Damage is a global effort that requires contributions from a variety of sources. At the same time, it shows how resources must be directed from polluters to the most vulnerable developing countries (for further data, see interactive CMCC Data Explorer).

Conclusions

The research by IIASA and CMCC informs the Loss and Damage debate in two important ways. First, the policy framework presented offers an entry point for a comprehensive risk management and finance approach that can inform international Loss and Damage deliberations by highlighting synergies with adaptation, social and financial protection, and impact responses as a way to ensure coherence in climate policy and to comprehensively pay attention to the needs of the most vulnerable. This can provide insights for Loss and Damage deliberations at COP29 in Azerbaijan, including for the operationalization of the Fund for Responding to Loss and Damage, the Launch of the High-level Dialogue and the NCQF discussions on a post-2025 global goal on climate finance for supporting climate action in developing countries.

Second, the proposed methodological Loss and Damage needs funding approach coupling empirical and modeling estimates of climate change residual impacts with different historical responsibility principles provides innovative insights for delineating possible contributions and entitlements to Loss and Damage funding. Our estimates amount to US $395 [128–937] billion and show how Loss and Damage funding needs require flows from high/upper-middle income to mid/low-income countries across various principles of historical responsibility.

Our research also calls for an expanded research agenda. Several climate-related economic risks are still unquantified, and the extent to which adaptation can limit these impacts is not fully understood. Moreover, existing estimates typically do not capture non-economic impacts on humans and ecosystems, as well as non-use and non-anthropogenic values of natural capital, which are relevant, especially in developing countries. Further research is needed for generating qualitative and quantitative evidence also with respect to the increasingly existential climate risks and limits to adaptation.

IIASA and CMCC stand ready to further collaborate with policy, civil society and research to generate further relevant evidence and insight for informing Loss and Damage deliberations.